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Europe’s leaders pressured to ease debt

But uncertainty, violence deepen investor concerns

Riot police guarded a bank in Athens yesterday during a nationwide protest against the government’s latest austerity measures. Riot police guarded a bank in Athens yesterday during a nationwide protest against the government’s latest austerity measures. (Aris Messinis/AFP/Getty Images)
Associated Press / December 16, 2010

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Disagreement over how to fight Europe’s debt crisis deepened yesterday on the eve of a summit of European leaders. Violent protests and uncertainty deepened investors’ concerns.

Rioters in Athens smashed cars and hurled gasoline bombs at police during a nationwide protest and general strike against the government’s latest austerity measures.

Moody’s Investors Service Inc., a ratings agency, warned it may downgrade the debt of Spain — the eurozone country many economists say is too big to be bailed out the way Ireland and Greece, much smaller nations, already have been. The Irish Parliament yesterday gave its backing to a rescue package previously agreed to with the European Union and the International Monetary Fund.

Diplomats said the meeting of European Union government leaders today and tomorrow won’t bring dramatic decisions. Instead, it will focus on a small change to EU treaties to set up a crisis mechanism agreed on almost two months ago.

Pressure on policy makers to find a way out of the crisis remains high. Many economists warn that weak growth, paired with worries over the health of banks, has made the debt loads of countries like Greece, Portugal, and Ireland unsustainable. Concern that they won’t pay back their creditors has rocked bond markets and weakened the euro.

Calls for bolder action — increasing the eurozone’s $1 trillion bailout fund or creating pan-European bonds to boost confidence in the euro — are growing.

Germany’s chancellor, Angela Merkel — so far the most ardent opponent of both proposals — was attacked by the country’s biggest opposition party. A leader of the Social Democrats, Frank-Walter Steinmeier, and Peer Steinbrueck, Germany’s former finance minister, said a “more radical, targeted effort to end the current uncertainty’’ is necessary.

They called for a partial restructuring of the debts of Greece, Ireland, and Portugal; guarantees for the bonds of stable countries; and limited introduction of pan-European bonds.

Even Social Democrat leaders were doubtful the Eurobond proposal would get a hearing; EU officials said an increase in the bailout fund would not be ruled out.

Moody’s warned it may downgrade Spain’s debt because the government is vulnerable to a borrowing crunch next year, when the recapitalization of banks could prove more costly than expected. It does not expect the country to need a bailout.

In Greece, the seventh general strike of the year grounded flights, closed factories, and disrupted hospital and transport services. In Athens, youths hurled rubble at police. The clashes were among the worst since the start of Greece’s financial crisis.

Late Tuesday, the Greek government won a key vote on pay cuts, salary caps, and involuntary staff transfers at state companies. The measures also reduce unions’ collective bargaining power in the private sector, allowing employers to substantially cut salaries.